Sharemarket quarter set to end on a high note

The Australian sharemarket is heading for its best quarter in three years, led by information technology, consumer staples and health stocks.

The S&P/ASX 200 index is sitting at a 7.7 per cent return as the market goes into its final week of the September quarter. Unless there is a data shock that surprises to the downside this week, it is on track for its best return since the three months ended September 2009, when Australian equities finished up nearly 20 per cent.

The local sharemarket is likely to open steady today, with SPI futures ending unchanged on Saturday morning at 4410 points. Wall Street closed flat on Friday.

One of the most important data releases this week will be China’s MNI business sentiment and the HSBC manufacturing PMI, which will give a better idea of the health of the world’s second-largest economy and is likely to affect mining stocks.

“My sense is the market is back to around fair value now," said Bank of America Merrill Lynch analyst Joshua Kirkwood.

“There’s still earnings downgrades that need to come, particularly in terms of the resources sector, but I think the market is on top of that issue."

The run-up has coincided with a bout of monetary stimulus and firmer policy announcements from the United States Federal Reserve and the European Central Bank.

But October runs the risk of a crash, warned FIL Investment Management portfolio manager Kate Howitt.

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“The US market is at four- to five-year highs, its technical indicators are all pretty stretched.

“The most rudimentary mean reversion suggests it’s time to take a break, because stockmarkets just don’t move in a linear fashion for very long," she said.

The market is still vulnerable to short-term pull backs given ongoing economic problems in Spain and Greece, and uncertainty in China.

Mr Kirkwood agreed there were still a lot of issues looming as the market moves into October.

“Going forward, the question the market is grappling with is whether quantitative easing will improve growth in the US. Our call is it will help at the margin, but the fiscal cliff makes us sceptical that the US economy is off to the races."

There is also the upcoming annual general meeting season,where some analysts have forecasted more downgrades which could peg this quarter’s gains.

“The most important thing in October is the AGM season. That will be what we are focused on, with revisions to earnings guidance and benchmarks of how companies are going relative to expectations," Mr Kirkwood

The best gains in the September quarter have come from the information and technology sector with the likes of Carsales.com.au, Computershare and Iress up 22.2 per cent, 14.7 per cent and 10.4 per cent respectively. “Car sales has been doing very well because it’s one of those few stocks that doesn’t have the headwind of being undercut by online," Ms Howitt said.

The defensive health sector has also had a good run and is up nearly 10 per cent, as investors park their money in the high-yielding health stocks.

Private hospital operator Ramsay Health Care and hearing aid manufacturer Cochlear pulled the index up 2.5 per cent and 2.6 per cent respectively. Elsewhere, blood plasma group CSL, which has the heaviest weighting on the health index, has risen 11.5 per cent.

“[Investors] like yield and also structural growth stories, so you could really pick out the health sector there," Mr Kirkwood said. “It has growth that is independent of economic growth."

Other big movers for the September quarter are the consumer staples, with heavyweights Woolworths and Wesfarmers up 9.3 per cent and 16.2 per cent. Mr Kirkwood said this comes from the search for earnings certainty. Consumer discretionary stocks, on the other hand, have been the worst performing sector.

“A lot of consumer discretionary stocks have not only had cyclical headwinds, but also structural challenges with online chopping into their business," Mr Kirkwood said.

The flight to high-yielding defensive stocks has been a theme over the past 18 months, with the mining sector facing headwinds from a slowing China and falling commodity prices.

Even the embattled resources sector has had a good three months, with the oil and gas and materials sector rising 6.3 per cent and 7.1 per cent respectively. A large part of this is due to the surge in gold stocks, which have rallied in response to the rising spot gold price, up 11 per cent over the quarter to date.

Small cap gold miner, Oceana Gold is the best performing stock so far over the quarter, up 65.2 per cent.

“You’ve got a time when there’s been a bit more optimism, with support from policy announcements that people having been waiting for, liquidity from the ECB, QE3 from the US and more quantitative easing from the central bank in Japan," Ms Howitt said. “People generally expected that would be supportive for risk assets like stocks and commodities."